Law of the Game on Joystiq: EA + Take-Two =/= Monopoly

Each week Mark Methenitis contributes Law of the Game on Joystiq, a column on legal issues as they relate to video games:

I have a great deal of respect for fellow Joystiq columnist and GamePolitics.com Editor Dennis McCauley, but I have to disagree with his most recent column on the EA Take-Two situation. Or at least, while I agree in spirit with his assertion that EA is trying to eliminate the competition in the sports games market with this buyout offer, in practice I don't think EA absorbing Take-Two will have any actual effect on the sports games market. This is in part why I think the Federal Trade Commission's recent inquiries are likely just routine investigation. However, I'm getting ahead of myself. Before explaining why I think this is the case, I should explain the basis for the complaints about the merger: anti-trust.

Anti-trust deals with the law of competition among businesses. In a capitalist economy, there are proven economic detriments to having monopolies or unfair competition, and therefore the government has seen fit to place restrictions on certain practices that can be injurious to a capitalist economy. In fact, the first US law dealing with anti-trust was the Sherman Act of 1890. Of course, this is not universally approved of, nor is the act universally welcomed; even economists as notable as Alan Greenspan have found fault with the Sherman Act, but I digress. The important point to note is that anti-competitive and monopolistic practices are regulated.

One important aspect of anti-competition law is the FTC's ability to investigate and approve mergers and acquisitions. Under the Sherman Act and its revisions, the FTC is put in the position of 'merger control.' That is, if the FTC believes that, based on the totality of the circumstances, the merger would 'substantially lessen competition,' then it can stop the merger. This happens in the US as well as in many other countries. More importantly, all mergers of companies over a certain size (generally, one party with over $100 million in sales and the other with at least $10 million in sales) are subject to this restriction, so it's not unusual for the FTC to be requesting information from EA. EA and Take-Two are both large enough that the FTC should almost certainly have to give clearance in advance of the merger.

Applying that concept to another real world example, if Microsoft were to be in a position to acquire Apple, that would substantially lessen competition. On the other hand, if id Software were to acquire Gearbox, there wouldn't be a substantial change to competition in the games market. Of course, not everything is nearly so cut and dry. If, say, Ford were to acquire Chrysler, it wouldn't much change the landscape of the global car market, but it would dramatically change the landscape of US car manufacturers. (I really don't want to speculate what the FTC would decide.) Remember, if you will, the EB Games and GameStop merger. While that basically consolidated the retail used games market, it didn't affect overall used game competition, as eBay and other online retailers make up a substantial portion of the market. That merger was, obviously, allowed to go through.

The real problem for lawmakers is balancing the economic inefficiency of certain anti-competitive and monopolistic practices with the potential efficiency that often comes from economies of scale. Economics is a complex area of study, but putting things as simply as possible: not all competition is good and not all monopolies are bad. Basically, sometimes a larger company can more efficiently produce or acquire a product, thereby lowering the price to the consumer. This all depends on the product or service in question though, as some may operate more efficiently with many small players in the market while others work better with a few large competitors.

This brings us back to EA and Take-Two. Many see EA's proposed takeover of 2K sports as an attempt to end competition. I, however, think the competition has long since been over. In fact, it died the day EA signed an exclusive agreement with the NFL. Given that EA will likely renew that contract from now until the end of time, it seems impossible for any sports game developer to compete, at least in football games, with EA Sports. While the same fate hasn't yet fallen on basketball, baseball (almost!), or hockey, it may only be a matter of time before more exclusive license agreements fall into place.

Ultimately, the FTC may not approve the merger, or state the deal cannot go forward with 2K Sports as part of the Take-Two package. But ultimately, the EA acquisition of Take-Two is not nearly as anti-competitive as it may appear. Other companies are still free to pursue sports games to the extent they can dodge the exclusive license agreement barrier. Who knows, perhaps with 2K Sports out of the picture, one of the other major developers, like Ubisoft, will open a new sports games studio, or maybe 2K Sports staff members would set out on their own. The end result of a merger or acquisition is rarely predictable. It's even possible sports games enthusiasts will find themselves with better options than they have now.

Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.

The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or The Vernon Law Group, PLLC. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.